Thursday, June 12, 2014

Summer Camp 40% Off, Thanks Uncle Sam

Summer Camp 40% Off, Thanks Uncle Sam

Ashlea Ebeling - Forbes Staff

Are summer camp costs adding up? If you send your kids to camp so you can work, Uncle Sam can help you cut the price by 20% to 40%.

Summer camp? Really. Day camp counts as “dependent care” (aka child care), and there are actually two ways Uncle Sam helps subsidize it—through the dependent care tax credit and workplace dependent care flexible spending accounts. Depending on your tax situation, one break might be worth more than the other, and in some cases, you might use both.

Too busy getting medical forms to the pediatrician and back to the camp office to worry about taxes? For potentially $1,200 to $2,200 of annual savings, it’s worth figuring out.

The first hurdle is that you (and your spouse if you’re filing jointly) have to have earned income. The point is you’re working so you can’t look after your kids. Your kid campers have to be age 12 or younger when the care was provided. So if your kid turns 13 in the middle of the summer, say Aug. 1, send him to that expensive computer camp in July and take that vacation to the beach in August. Note: Expenses for overnight camps do not count!

If you’re lucky enough to work for an employer offering a dependent care flexible spending account (it works a lot like a healthcare FSA), you should generally fund that first. You can defer up to $5,000 a year (per family) into a dependent care FSA. It’s pre-tax, so depending on your federal and state tax rate, it’s like getting 40% off. One problem with the workplace FSA is that you usually have to plan in the fall how much money you’ll put in the account for the following summer, so it’s a bit of a guessing game. And if you don’t use all the money you stash away, you lose it, so don’t overstuff it.

You can always fall back on the dependent care tax credit, which is typically a better deal for workers in a low tax bracket from the start. If you earn $43,000 or more, the credit is 20% (it goes up to 35% for the lowest income workers). You can apply up to $3,000 of expenses for one child, and up to $6,000 in total expenses for two or more children, towards the dependent care tax credit. So if you’ve tapped out the $5,000 workplace FSA, you can still apply another $1,000 of expenses towards the credit.

In the meantime, make sure you save receipts for camp and ask for the camp’s taxpayer identification number. You’ll need that number and the camp address to put on your tax return as substantiation of the expenses for the dependent care tax credit. Save the receipts as back up. For the workplace FSA, you need the camp address and a receipt or a signature of the camp director.

Some more caveats: You can’t include the cost of care provided by your spouse or your child who is under age 19 at the end of the year. You also cannot count the cost of care given by a person you can claim as your dependent (say grandma lives with you as a dependent and helps take care of your daughter).

The IRS spells out all the rules with examples and a flow chart in Publication 503, Child Care And Dependent Care Expenses.